Although there are encouraging signals that Chinese equities listed on U.S. exchanges are less likely to be delisted, some experts are still worried about their future.
Investors across the world may be getting ahead of themselves.
“everything is very, very early right now.”
According to Shehzad Qazi CEO of China Beige Book InternationalIn March, Chinese equities plunged and then soared as Beijing sent encouraging signals to its companies listed abroad.
After falling by 25% in the first half of the year, the MSCI China index surged nearly 24% last month. All Chinese equities, whether traded in Hong Kong, mainland China, or the United States, are included in this index. Most of its leading stocks are in the technology industry. Between mid-March and April 1st, U.S.-listed Chinese stocks on CNBC’s China ADR index rose by about 25%.
“I get the sense that a lot of investors right now are very happy with the progress but not really focusing on the fact that there’s a lot of uncertainty out there, a lot of unknowns,” Qazi said on Monday’s “Squawk Box Asia” on CNBC.
Former SEC chair Harvey Pitt said, “This is certainly an attempt by the Chinese government to give the image that there would be greater openness.” Pitt led the SEC from 2001 to 2003. In other words, the devil will be in the specifics.
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“The only issue will be: are individuals who are investing today in Chinese enterprises doing so with their eyes wide open?” said Pitt, who is now the CEO of consultancy company Kalorama Partners.
Chinese company stocks took a hit in early March as the U.S. Securities and Exchange Commission began isolating Chinese firms at risk of delisting for failing to meet auditing criteria. There were companies like Baidu, a major player in the computer industry, BeiGene, a biotech company, and Yum China, a fast food chain.
Markets for Chinese equities listed in New York City rose higher on Friday on news that Beijing may allow U.S. officials unfettered access to corporate books and records. The result of this would be that these businesses may keep trading openly in the United States. In an interview with CNBC, an official from China’s Securities Regulatory Commission said that the agency has suggested to certain accounting firms that they be ready for joint inspections.
It was reported by Reuters over the weekend that Beijing has suggested modifying confidentiality regulations surrounding offshore listings in order to remove a legal barrier to collaboration between the two nations in auditing.
The new regulations in China, as stated by Qazi, “seem to imply a good step forward.” But the fact remains that, ultimately, nobody knows which particular corporations the SEC will be allowed to audit in accordance with U.S. legislation.
Will the industry’s biggest names—Baidu, Alibaba, and Tencent—allow audits by U.S. authorities? He said, “Because if they don’t, you’re removing a lot of market capitalization.”
Too early to call it a ‘dragon market run’
Various experts have warned investors to exercise caution.
This market rise will likely need to be supported by concrete official action to stabilize China’s property sector. Seema Shah, chief strategist at Principal Global Investors, said last week, “China’s zero-COVID policy and activity limitations will also impact on consumption and mood in the short term, while its ties with Russia means the potential of U.S. sanctions will linger over markets.”
China’s economy has been clouded by the property loan issue. Over thirty equities, including Chinese property developers Sunac China, Shimao, and Kaisa, were prohibited from trading on the Hong Kong stock market lately because they were late in reporting profits.
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Although China may be taking a more market-friendly approach again, Shah warns that it is too soon to declare a new dragon market run.
High oil costs, repeated lockdowns, and other issues continue to hamper profit growth, according to Kieran Tompkins of research company Capital Economics.
The assistant economist stated on April 1 that the conflict in Ukraine and China’s partnership with Russia have sparked worries that the invasion would speed the process of divorcing the country’s financial system from the US.
Although the Chinese stock market’s value is cheap in comparison to other MSCI equity indexes, “we anticipate that it will stay under pressure,” he said.
